Tax hikes for investment partnerships

June 9, 2010 at 1:40 pm

A long fight over how the federal government taxes investment partnerships is ending as Senate Democrats now plan to more than double taxes on private-equity, hedge-fund and certain real-estate managers. It would no longer let people running such partnerships pay the lower capital-gains taxes on what were basically wages. The tax hike on “carried interest” expected to raise $14.5 billion over 10 years. Law Professor Daniel Berman, director of the Graduate Tax Program and both a Treasury and Congressional tax counsel, says that any such compensation from investment performance is still fundamentally pay for services rendered.

“It is common to reinvest after-tax compensation for capital gains. But when the amounts subject to investment risk were awarded in exchange for services but have not yet been recognized as taxable income, those amounts should be taxed as compensation when paid.”